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India needs to do more if FDI flows are to increase.

Date: 28-02-2019
Subject: India needs to do more if FDI flows are to increase
Given the Indian economy’s relative attractiveness vis a vis China in the last few years—lower wage costs and a strong technology sector—it should attract large FDI flows. The combined fresh inflows in FY16 and FY17 were a hefty $83.5 billion; in FY18 this was $44.9 billion—if reinvested earnings of FDI projects are added, the FY16-17 number rises to $115.8 billion and FY18 to $61 billion. However, the trend seems to have reversed because, at $33.5 billion in the nine months to December 2018, there has been a contraction of 7% year-on-year in terms of fresh equity flows.

Although the government has eased the investment limits, sectors such as defence haven’t seen meaningful inflows. Foreign firms, it would appear, are satisfied with a 49% stake in a venture or a bigger one for bringing in state-of-the-art technology. By and large, it is the services space that continues to pull in the bulk of the investments and not manufacturing, although these nearly doubled to $17 billion in the five years to 2016-17. In fact, there has been an absence of momentum in the Make-in-India programme and, for that matter, in manufacturing in general. Bigger FDI inflows in defence would depend upon the pace of defence orders under the Make-in-India programme, but defence orders haven’t gained pace under the NDA either.

A more lenient FDI regime is needed both for manufacturing and in areas such as multi-brand retail to spur job creation. But simply freeing up investment limits isn’t enough, it must be easy to do business. When the UPA threw open multi-brand retail to global retailers, the response was less than lukewarm because of the several riders attached to the policy. Even otherwise, the rigid labour laws, poor infrastructure and the unstable regulatory environment seem to have hampered flows into industry; a good chunk of FDI has come into companies that are well-established and where regulation is relatively less important such as FMCG multinationals. The government needs to fix the problems on the ground and shrug off its conservative approach that limits investments. It is a pity global pharma majors aren’t investing more in India’s pharma sector given the large pool of scientists and science graduates. The sector pulled in less than $1 billion each in FY16 and FY17, lower than the $1.5 billion in FY15. The auto sector, too, saw just $1.6 billion in FY17 compared with $2.6 billion in FY16, although India has relatively cheap labour and also a big home market. The biggest amounts of FDI have come into the e-commerce space—$8 billion plus in 2018—leading to the creation of thousands of jobs. The inflows of this fiscal have been dominated by those in services, computer hardware and software, telecommunications and chemicals.To be sure, fresh FDI inflows to India have nearly doubled over the past decade to $44.9 billion in FY18—$61 billion including reinvestments, that adds up to around 2.4% of GDP. But, given how local capital is limited, it is critical India attracts much more so as to reduce the dependence on fickle portfolio flows. Of the total net capital flows of $240 billion, estimated in the three years to FY18, close to 55% was FDI, the rest portfolio flows were into debt and equity. In the ten years prior to that, FDI accounted for less than 30% of the inflows. India’s current account deficit widened to 2.9% of GDP from 2.4% in Q1FY19 and, worryingly, the relatively stable net FDI saw trailing twelve month flows dip to $28 billion. This cannot be good news.

Source: financialexpress.com

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